Cheese price hemorrhaging may be over
By LEE MIELKE
For the Capital Press
The hemorrhaging may be coming to an end at the Chicago Mercantile Exchange.
Cash Cheddar cheese blocks dipped to $2.1650 Thursday, then inched up a half-cent Friday, to close at $2.17 per pound, down 18 cents on the week, down 26 1/4-cents from its recent record high, but still 33 1/4-cents above a year ago.
The barrels closed at $2.08, up a half-cent Friday, but down 14 1/2-cents on the week, 29 3/4-cents below its recent peak, and 32 1/2-cents above a year ago. Eleven cars of block traded hands on the week and three of barrel. The lagging National Dairy Products Sales Report-surveyed U.S. average block price hit $2.3983 per pound, up 5.4 cents and the barrels averaged $2.3583, up 3.7 cents.
Some large cheese manufacturers report that production is mostly steady to slightly lower from the last two weeks, according to USDA’s Dairy Market News. Some inquiries for surplus milk are being made, offering up to $1.60 above class, but sellers are hard to find. Especially in central to northern regions of Wisconsin, there are still occasional patches of snow lingering in many fields. With hay still considered high priced and feed quality lagging, milk production is not yet as robust as might be expected. Cheese price weakness continues to be a topic of great interest.
Butter held all week at $1.97 per pound, 23 cents above a year ago. No butter was sold at the CME all week. NDPSR butter averaged $1.9697, up 7.2 cents.
DMN reports that Midwest butter prices are mostly steady on a relatively quiet week. However, many international prices are trending lower, slowing export orders. The market tone is steady. Some manufacturers are shifting production towards larger volumes of 82 percent after completion of last-minute 80 percent holiday orders. A few butter churn operators reduced churn rates as they sold some cream supplies at premiums. Overall production is steady to lower. Domestic demand is steady, but print sales are backing off. Inventories are mostly light, but are expected to grow upon entering the seasonal rebuilding period.
Cash Grade A nonfat dry milk plunged 11 cents Wednesday but rallied some and closed Friday at $1.9075, down 9 cents on the week. NDPSR powder averaged $2.0524, down 2.1 cents, and dry whey averaged 67.1 cents, up 0.4 cent.
Jerry Dryer, editor of the Dairy and Food Market Analyst, called it “a classic cheese market. It overreacts, going in either direction.” Dryer said, “It was probably too high, too long and now we’re facing a correction.” He added that a “swift correction like this rather than Chinese water torture, a quarter-cent per day for two months, makes for a better market,” and he predicts a cheese market floor above $2 per pound. Ditto on butter and nonfat dry milk, according to Dryer, and he believes there’s still strength in the whey price so “the sky is not falling.”
Switching to Wednesday’s World Agricultural Supply and Demand Estimates report, Dryer said the entire report caught his attention because of the significant upward price adjustments. “They now expect the cheese price to average about $2 per pound,” Dryer said, “Twelve cents more than they were forecasting just a month ago.” Their butter forecast was raised by 15 cents, to $1.80 per pound for the year, he said, but they held their nonfat dry milk forecast at $1.85, and bumped up their whey forecast to 63 cents “So that gives us an All Milk price around $23.00 per hundredweight,” he concluded.
The good news this week was exports. The U.S. Dairy Export Council reported that U.S. February export volumes were the highest in six months (on a daily-average basis), led by strong sales of cheese, whey proteins and butterfat. U.S. suppliers shipped 160,510 tons of milk powders, cheese, butterfat, whey and lactose in February, up 19 percent from last year. Total value of all exports was $585.2 million, up 37 percent from a year ago. On a daily-average basis, this is the highest figure ever.
February cheese exports totaled 31,264 tons, up 44 percent from a year ago and the most ever on a daily-average basis. Shipments to Mexico were up 46 percent while Japan was up 58 percent, and South Korea, up 43 percent posted large gains. Exports to Saudi Arabia nearly tripled.
Total whey exports topped 86 million pounds in February, the most in six months. Export volumes were 18 percent more than January (daily average) and 11percent more than a year ago. Exports of dry whey, whey protein concentrate and whey protein isolate were all above prior-year and prior-month levels. China remains the major customer for U.S. whey products, with February purchases up 47 percent from a year earlier.
U.S. exporters also continue to expand shipments of butterfat, up 102 percent from last February, whole milk powder, up 191 percent, and milk protein concentrate, up 58 percent. In the last eight months, butterfat exports averaged 21.4 million pounds per month, with the majority going to the Middle East/North Africa region. Major customers for WMP are Algeria, China and Vietnam. Top buyers for MPC are New Zealand and Morocco.
Exports of nonfat dry milk/skim milk powder (NDM/SMP) have slowed considerably from the volumes shipped from April- October last year. During that seven-month stretch, U.S. exports averaged 113 million pounds per month. In February, exports were just 79.7 million pounds.
As a result, NDM/SMP exports in January represented only 45 percent of U.S. powder production for the month, leading to a hefty build-up of inventory. In the first two months of the year, NDM/SMP shipments to Southeast Asia were up 38 percent from the prior year, but sales to Mexico were down 22 percent. Details are posted at www.usdec.org.
Cooperatives Working Together accepted 17 requests for export assistance this week to sell 4.56 million pounds of cheese and 2.48 million pounds of 82 percent butter to customers in Asia, Central America and the Middle East. The product will be delivered through August and raised CWT’s 2014 cheese exports to 40.79 million pounds plus 31.9 million pounds of butter and 3.37 million pounds of whole milk powder to 27 countries.
The Agriculture Department, in its latest World Agricultural Supply and Demand Estimate report issued this week raised its 2014 milk production forecast from last month as strong returns are expected to encourage a more rapid expansion in cow numbers and increased milk per cow. Look for 2014 output to hit 206.1 billion pounds, up 400 million pounds from last month’s estimate, and compares to 201.2 billion pounds in 2013 and 200.5 billion in 2012.
Fat-basis exports were raised on higher sales of cheese and butter, but the skim-solids export forecast was lowered on weaker-than-expected nonfat dry milk sales. Skim-solid imports were reduced slightly due to lower imports of milk protein concentrate and casein.
Product price forecasts for cheese, butter, and whey are higher, supported by strong demand and price strength to date. However, the NDM price was unchanged at the midpoint as export demand is weaker than expected.
Class III and IV prices were raised on higher product prices. The 2014 Class III is expected to average around $20.65 per hundredweight, up from the $19.25 projected a month ago, and compares to $17.99 in 2013 and $17.44 in 2012. Look for the Class IV to average $21.35, up from last month’s $20.70, and compares to $19.05 in 2013 and $16.01 in 2012.
The California Department of Food and Agriculture announced their May Class I milk price this week at a record high $25.88 per hundredweight for the north and a record $26.15 for the south. Both are up $1.00 from April, after slipping 50 cents from March, and are $6.49 above May 2013. That pulls the 2014 Class I average for the north to $24.42 per cwt., up from $19.66 at this time a year ago, $18.03 in 2012, and $19.03 in 2011. The southern average now stands at $24.69, up from $19.93 a year ago, $18.30 in 2012, and $19.30 in 2011. The federal order Class I base price is announced by USDA on April 23.
Wisconsin is still the “big cheese” when it comes to manufacturing the tasty treat but total cheese output was down in America’s Dairyland in February, according to USDA’s latest Dairy Products report. February output, at 214.96 million pounds, was down 5.1 million pounds or 2.3 percent from February 2013 and down 27.5 million pounds or 11.4 percent from January 2014.
California output, at 185.6 million pounds — just 29.4 million lbs. below Wisconsin — was up 10.5 million pounds or 6 percent from a year ago but down 19.3 million or 9.4 percent from January.
The third largest total cheese producer in February was Idaho, at 61.3 million pounds, followed by New Mexico at 58.7 million, New York at 54.7 million, Minnesota at 51.5 million, and Pennsylvania at 31.2 million pounds.
One of the driving forces motivating California dairy producers to consider forming a Federal Milk Marketing Order in the state is the discrepancy between California’s Class 4b cheese milk prices and the comparable Federal Order Class III manufacturing grade milk price. The March 4b was announced at a record high $22.16 per hundredweight, however, was it $1.17 below the federal order Class III price. The price gap is a consistent monthly occurrence.
The gap started 2014 at just 84 cents below the FO Class III price, then jumped to $2.21 in February, and that despite the temporary price increases mandated by the California Department of Food and Agriculture, which expire in July 2014. Last year the January 2013 4b price was $2.30 below the FO Class III, February was $1.84 below, and March was $1.91 below. The difference gap averaged $1.57 in 2013 and ranged from a low of 67 cents in April to $2.30 in January. It averaged $1.91 in 2012 and ranged from 98 cents in June to $2.82 in January. So far in 2014, the gap average is at $1.41.
The Milk Producers Council’s Rob Vandenheuvel has written often about this gap in his newsletter, charging that dairy producers are “subsidizing” California cheese manufacturers. Manufacturers argue that the price advantage enables them to be competitive, to make up for the distance factor in shipping cheese.
But, the price gap is a bit more complicated than distance factors. A joint effort by John Newton, Department of Agricultural and Consumer Economics University of Illinois at Urbana-Champaign, Cameron Thraen, Department of Agricultural, Environmental and Development Economics at Ohio State University, and Andrew Novakovic, of the Charles H. Dyson School of Applied Economics and Management at Cornell University, address the issue.
Their key findings are that the 2014 Farm Bill permits California producers to keep some form of their unique quota system if a federal milk marketing order is adopted. The value of the California quota statewide is estimated to exceed $1 billion and entitles California producers to as much as $1.70 per hundredweight in additional milk price revenue. Any gains in farm level milk prices due to the adoption of federal order classified prices in California would be dependent on the market-wide utilization of milk and may be offset if high value milk is consistently de-pooled.
Current California state order pricing rules contribute to California’s competitive position in the national cheese market. If federal milk marketing order provisions are adopted in California higher milk prices paid by California cheese makers may make them less competitive along the supply chain and could provide long-run incentives to shift processing capacity away from cheese into other dairy ingredient sectors. The posting is a must read for Californians and is posted at: http://farmdocdaily.illinois.edu/2014/03/2014-farm-bill-key-factors-to-consider-ca-fed-milk-marketing-order.html.
FMMOs incorporate wholesale whey product prices in the class III price formula directly while California indirectly incorporates the whey price per pound using a whey factor value formula. The formula is capped at $0.75 per hundredweight and makes the California price much less responsive to changes in whey prices.
This and several other issues are addressed by Newton, Thraen, and Novakovic.
Will a federal order solve this issue? Would it put more money into producer’s hands? Would that affect cheese makers’ competitiveness? And, what if it did? Those are some key questions California producers must think about.